Fed weighing further easing, Bernanke says

Calls study ‘prudent planning’

WASHINGTON (MarketWatch) — Just two weeks after completing a second extraordinary effort to juice the moribund U.S. economy, the Federal Reserve is contemplating more “untested” steps, the head of the central bank said Wednesday.

Federal Reserve Chairman Ben Bernanke says the central bank is examining several untested means to stimulate growth if conditions deteriorate, even though the central bank believes the temporary shocks holding down economic activity will pass.

At the end of June, the Fed completed a plan to buy $600 billion of Treasury bonds in what markets have dubbed QE2.

“The possibility remains that the recent weakness may prove more persistent than expected and that deflationary risks might reemerge, implying additional policy support,” Bernanke told the House Financial Services Committee, in the first of two days of testimony about the economy and monetary policy.

Fed officials’ outlook

At the moment, Fed officials see a recovery that “will likely remain moderate,” Bernanke said, with the unemployment rate falling “only gradually.” Inflation is expected to subside in coming months, he said.

Fed officials have forecast that the economy will expand at around a 3.5% rate over the next 18 months and Bernanke said this remained the forecast.

“Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation,” Bernanke said. Read full text of Bernanke’s prepared remarks.

But there are a “range of uncertainties” about the strength of the recovery and the Fed must engage in “prudent planning” to explore ways for stimulating demand, he said.

Three approaches

Bernanke discussed three approaches to further easing in his prepared remarks.

One option, Bernanke said, would be for the Fed to provide more “explicit guidance” to the pledge that rates will stay low for “an extended period.”

Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to “increase the average maturity of our holdings.”

Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, “thereby putting downward pressure on short-term rates more generally.”

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